Equity income funds are popular with our clients. Most aim to generate a rising income, and increase the value of your original investment, over the long term. The income can be paid out, or reinvested in the fund to boost long-term growth.
Different fund managers take different approaches to income investing. Some focus on larger companies that are seen to be more stable and have paid regular dividends for many years. Others invest in higher-risk small and medium-sized companies. These might pay a lower income to start with, but have more growth potential.
We like the simplicity of equity income investing.
Investing in a dividend-paying company means you align your wealth with theirs. You're entitled to receive a share of any profits paid out as dividends. The best companies will grow their profits and dividends.
Not all companies will be successful though. This is why we like equity income funds. An expert fund manager invests in a range of companies. This reduces the impact of one getting into trouble. It’s less risky and more convenient than trying to choose individual shares yourself.
Interest rates are still at historic lows. They're unlikely to rise significantly in the short term. So the prospect of regular dividends from some of the UK's most successful companies is attractive.
Dividends are clearly important for income investors. But they're just as important for those who want to grow their investment. If you don't need the income now, you can reinvest the dividends to buy more shares. This means you get even more dividends in future. Repeating this process over a long period is a tried-and-tested way to grow your wealth.
We think equity income funds can provide the foundation of almost any investment portfolio. Keeping enough cash is important. But an income fund could be considered for savings that aren't needed in the short term. Investments aren't secure like cash though, and will go up and down in value, so you could get back less than you invest.
Please remember past performance is not a guide to future returns. Where no data is shown, figures are not available. This information is provided to help you choose your own investments, remember they can fall as well as rise in value so you may not get back the original amount invested.
The average fund in the UK Equity Income sector hasn't performed as well as the broad UK stock market over the past year. A lot of investors favoured companies that are expected to offer more growth rather than pay an income.
Equity income funds have historically focused on companies that pay more reliable dividends. Many of them sell goods or services that consumers buy time and time again. Pharmaceuticals, tobacco, utilities and telecoms companies, for example. Their share prices haven't performed quite as well over the past year.
Companies that tend to be more sensitive to the health of the UK economy have performed better. This includes mining and oil & gas companies, which had previously been out-of-favour with investors.
Equity income has been a good way to grow investors' wealth over the long term. Companies that pay higher dividends have tended to outperform lower-yielding companies, but there have been times when the reverse is true. We think this style remains an attractive way to invest over the long run.
IA UK Equity Income sector versus the FTSE All Share - one year performance
Past performance is not a guide to the future. Source: Lipper IM to 31/05/2018.
|Annual Percentage Growth|
| May 13 -
| May 14 -
| May 15 -
| May 16 -
| May 17 -
|IA UK Equity Income||11.8%||10.1%||-4.2%||18.9%||3.9%|
Past performance is not a guide to the future. Source: Lipper IM to 31/05/2018.
Our favourite funds in the sector
Each of the funds below can take their charges from capital. This can increase the yield but reduce the potential for capital growth. All investments can fall as well as rise in value so you could get back less than you invest.
Other funds in the sector
Source for performance figures: Financial Express
This fund focuses on higher-risk small and medium-sized companies. We think this boosts growth potential and means the fund could sit well with one focused on larger firms.
The fund performed similarly to the broader UK stock market over the past year. The shares of some companies held in the fund fell in value at the start of 2018, but recovered more recently. This includes DFS Furniture, which now has a larger share of the furniture market after taking over Sofology. BCA Marketplace, which owns webuyanycar.com, also saw its shares bounce back. The fund is managed by Siddarth Chand Lall, who we rate highly. He also has the support of one of the UK's most experienced smaller company investment teams.
The core of the fund invests in larger companies that are expected to pay consistent dividends. Out-of-favour companies with the potential to recover are then added to boost dividend growth potential.
The fund went through a tough patch of performance last year. Investments in healthcare companies didn't help because they struggled at times. It also missed out on some of the gains in the mining and resources sectors. These areas performed well but the fund doesn't have a lot invested here. The fund has performed better than the broad UK market so far this year. We think Richard Colwell is an experienced and capable fund manager who could deliver good returns for long-term investors.
Francis Brooke looks for businesses he thinks will provide stability to the fund. This approach means the fund has tended to hold up relatively well when the market falls, but lag when it has risen strongly. It's a more conservative option in this sector.
Francis Brooke usually avoids companies that are more sensitive to how well the UK economy is doing, such as resources companies. But some of these areas have done well over the past year, so this held back returns. His focus on companies that have been more resilient during tougher times has worked well over the long run. This includes a number of consumer goods companies such as Unilever and British American Tobacco. The manager only invests in a small selection of companies, which can increase risk as each one can have a greater impact on performance.
Mark Barnett is prepared to invest this fund differently to other UK income funds. He'll invest in areas currently ignored by other investors, with a view they'll return to favour.
The fund's performance has been weak over the past year. Investments in domestically-focused businesses, and problems at some individual companies, held back performance. He’s a hugely experienced income investor though and we think the setback is temporary. He thinks financial, consumer and real estate companies currently offer some of the best opportunities, so he's focused the fund on these areas. He can invest in companies of all sizes, including higher-risk smaller companies. The fund doesn’t currently feature on the Wealth 150. Mark Barnett is a good fund manager, but the Wealth 150 is focused on other excellent funds, which are also managed with lower ongoing charges.
The managers look for companies going through change, which could improve their future prospects. They focus on companies that pay an attractive income while they wait for the changes to take place.
We recently removed this fund from the Wealth 150. This is because the current manager, Chris Reid, is stepping down as manager and leaving Majedie at the end of June. Chris Field will take over lead management and we believe he'll do a good job of looking after the fund. In November, Mark Wharrier will become the fund's lead manager. He's got a lot of experience working on UK equity income funds. We'd like to see how he settles in at Majedie before considering the fund for the Wealth 150 again. The fund invests in a relatively small number of companies, which means each investment can have a significant impact on performance, though it increases risk.
Latest research updates
Please note the research updates are not personal recommendations to trade. If you are unsure of the suitability of an investment for your circumstances please seek advice. Remember all investments can fall as well as rise in value so investors could get back less than they invest.
Our expert research team provide regular updates on a wide range of funds.